August 16, 2022

What is an HMO?

HMO stands for a House in Multiple Occupation and refers to a property rented out by at least three individuals who are not from the same household and share toilet, kitchen and bathroom facilities. 

Sometimes called a flat or house share, this type of housing solution is a popular option among students and individuals looking for more affordable accommodation, or the opportunity to live with more people. HMOs are also appealing to people who live in areas where rental prices are high. 

What is HMO Lending?

HMO rightly need a license from the local authority, as well as a specific HMO mortgage. This mortgage is designed to meet the development plans of landlords intending to rent a property on multiple tenancies, as opposed to a buy-to-let mortgage.

HMO vs Standard and Buy-to-Let Mortgages

Unlike a standard mortgage, an HMO property can be owned in a number of different ways, such as personal or under company ownership.

How the property ownership is set up impacts directly on the tax liabilities on revenue received from the rental income.

Remember, higher interest rates may apply for HMO mortgages when compared to a standard buy-to-let mortgage.

Why are HMO Properties Attractive for Landlords? 

  • Potential higher rental yield.
  • HMOs attract multiple renters, meaning there is more security if one tenant moves out. 
  • Ability to secure a family home for the future in an area they cannot currently afford.

How Can I Finance an HMO Property Purchase? 

You will need an HMO mortgage. This type of mortgage is specifically for landlords who want to rent out their property to at least three tenants who are not part of the same household. A traditional buy-to-let mortgage will not allow you to rent out your property to multiple individuals, so you must source lenders who specialise in HMO mortgage products. 

Do HMO Properties Require a License? 

Some do, but not all of them. Local councils are responsible for issuing HMO licenses, which are required for large HMO properties in England and Wales. HMO licenses are valid for a maximum of 5 years and must be obtained for each property (not for each landlord) that falls within the licensing criteria. 

A Large HMO Property Requires:

  • Five or more people who form more than one household rent the property
  • Your tenants share toilet, bathroom or kitchen facilities
  • At least one tenant or their employer pays rent 

You may still need a license if you have a small HMO depending on your local council requirements, so you must check with your council to avoid costly fines. 

Do HMO mortgage lenders have strict lending criteria?

Each HMO mortgage lender has its own set of criteria when deciding whether you qualify for financing. 

The majority of HMO mortgage lenders tend to base their eligibility criteria on several factors, including:

  • Your experience as a standard or HMO landlord 
  • The Property value
  • The amount you want to borrow 
  • Expected rental income from the property
  • The number of bedrooms in the property
  • Whether the property requires a license
  • If you hold the property in your name or a company name

Although some lenders are more lenient in criteria than others, all lenders will look at your age, income and credit history to make sure you meet basic qualifying criteria.

Additional Considerations

  • The implications on Stamp Duty, depending on the way you purchase the property and the ownership vehicle
  • Capital Gains Tax and the various liabilities that apply later down the line when you decide to sell the property
  • A larger deposit is usually required for HMO property purchase mortgages.
  •  The majority of lenders will want to ensure that the rental income not only services the loan repayments, but will also return a surplus to cover events such as void periods, interest rate rises, taxation and ongoing maintenance.
  • Some lenders will want to evidence of previous landlord experience.

Provide has everything you need to make an impressive application for HMO lenders, from budget planning sheets to previous landlord experience document outlines. With over 200 lenders on the platform, we can help you get the best rate possible on your HMO mortgage.

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